Low Macro-Prudential Risk in Record Number of Markets; Bottom of Global Credit Growth Cycle

Wednesday, March 7, 2018 / 09:45 AM / Fitch
RatingsFitch Ratings' updated macro-prudential risk
indicators (MPI scores) suggest low vulnerability to systemic stress in a
record high number of markets. This reflects widespread and sustained low real
credit growth, the key determinant of MPI scores. The global median for real
credit growth was 2.9% in 2017, in line with 3.0% growth in 2016 and a record
low since the global financial crisis of 2008, says Fitch in its latest
Macro-Prudential Risk Monitor.MPI scores in this report are updated to
incorporate 2017 data. Five markets revert to MPI 1, indicating low
vulnerability to systemic risk as measured by credit growth and appreciation in
asset markets and/or the real exchange rate. These are Cyprus, Mongolia,
Paraguay, Turkey, and Venezuela. There are no markets with a deteriorating MPI
score. The proportion of markets scoring MPI 1 stands at 80% - the highest
level since Fitch began this report in 2005, and up from 76% in August 2017.Ethiopia is now the only Emerging Market (EM)
scoring MPI 3, indicating high vulnerability to systemic risk, as Turkey and
Venezuela revert to MPI 1. For Venezuela, the improving score is partially
attributable to the distortionary effects of sustained hyperinflation. Ethiopia
is one of 14 EMs where real credit growth exceeded 15% in two successive years
in 2014-2017 (the trigger for an MPI 2 or below for EMs), down from 18 in the
previous report. This is 18% of all EMs included in the report.In the developed world, Hong Kong and Macao remain
on MPI 3, unchanged from the previous report. These are two of the nine
Developed Markets (DMs) for which credit/GDP is more than 5pp above trend in a
single year between 2015 and 2017 (the trigger for an MPI 2 or below for DMs),
one lower than in the previous report. This is 23% of all DMs included in the
report.Bank Viability Rating (VR) changes have led to four
Banking System Indicator (BSI) changes: El Salvador (to 'b' from 'ccc'),
Ireland (to 'bbb' from 'bb') and Ukraine (to 'b' from 'ccc') have improved; and
Venezuela has weakened to 'cc' from 'ccc'. Fitch has assigned a new BSI for
Mongolia ('b').The global median for real credit growth has
decelerated sharply over the last two years, from 5.6% in 2015; growth has
converged at low levels across the majority of markets. In 2017, only two of 76
EMs recorded credit growth above 15%, and only seven of 39 DMs saw growth above
5%. However, the strong global economic growth recovery, despite gradual
monetary policy normalisation, suggests that the stabilisation signals an end
to the downturn in the global credit cycle.EM median credit growth was 2.9% in 2017, unchanged
from the previous year and bringing an end to the slowdown that materialised in
2016. Prior to this, EMs had accounted for much of global credit expansion
following the global financial crisis. The stabilisation is supported by an
increase in domestic demand, steady commodity prices and a pick-up in world
trade.For DMs, median growth was 2.6% in 2017, slightly
down from 3.0% in 2016 and the fourth consecutive year of modest expansion in
the range of 2%-3%. However, the expected increase in investment and easing in
bank lending standards in many markets indicate that this is a bottoming-out of
the credit cycle.